Question

Target Corp. is a U.S. corporation. The company wants to expand its business in South America. The CFO has requested you to research, if these following countries has a tax treaty with the United States:

        

a)      Brazil

b)      Mexico

c)      Argentina

Please explain all these three countries, research if these countries tax dividends, interest, and royalties paid back to the U.S. parent. (Hint: the IRS.gov website and search for country specific treaties will help you.)

Answer 1

The United States of America ('USA') does not have tax treaties with Brazil and Argentina. However, USA does have a tax treaty with Mexico. This information is also reflected on the IRS website.

Tax implications in case of Mexico

Dividend

If Target Corp. has a wholly owned subsidiary in Mexico (say M1) and if M1 pays dividend to Target Corp, Target Corp will have to pay a tax of 10% in Mexico on the dividend income earned from M1 (as per paragraph 2(b) of Article 10 of USA Mexico Tax Treaty) unless Target Corp. has a permanent establishment in Mexico.

Interest

If Target Corp. has a wholly owned subsidiary in Mexico (say M1) and if M1 pays interest on loans (availed from Target Corp.) to Target Corp, Target Corp will have to pay a tax of 15% in Mexico on the interest income earned from M1 (as per paragraph 2(c) of Article 11 of USA Mexico Tax Treaty) unless Target Corp. has a permanent establishment in Mexico.

Royalty

If Target Corp. has a wholly owned subsidiary in Mexico (say M1) and if M1 pays Royalty to Target Corp, Target Corp will have to pay a tax of 10% in Mexico on the Royalty income earned from M1 (as per paragraph 2 of Article 12 of USA Mexico Tax Treaty) unless Target Corp. has a permanent establishment in Mexico.

In case of Brazil and Argentina

If Target Corp. sets up its businesses in Brazil/ Argentina through any structure, it will be able to pay back dividend, interest income and Royalty. However, the applicable taxes will be governed as per the local tax laws of Brazil/Argentina.

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